Federal Cut In Withholding Levy Holds Trap For Unwary Taxpayers

February 02, 1992|by ROBERT D. HERSHEY JR., The New York Times

Among the more than three dozen tax proposals in the budget request for 1993 that the Bush administration sent to Congress on Wednesday, the adjustment of withholding tables for most taxpayers to cut the amount taken out of each paycheck stands alone in needing no congressional assent.

It also represents, some analysts warned, a potentially dangerous trap for the unwary.

More than $2 billion a month in additional spending will be injected into the nation's economy this year as a result of the adjustment. But more than 8.5 million taxpayers who would otherwise be getting tax refunds in the spring of 1993 will owe the government money unless they take a simple precaution, Treasury figures indicate.

Although the Internal Revenue Service will waive penalties for underpayments of estimated income tax because of the adjustment, many taxpayers will have to scramble for the money to make up for the underpayment.

"It's play in '92, pay in '93," said David Berenson, national director of tax policy for Ernst & Young, an accounting firm. Berenson said he expected that despite the change, which was being put in place on Wednesday, relatively few people would bother to counter the government action by filing a form to readjust their withholding.

According to the IRS, 89 million income tax returns fall into the low-to-middle income categories, with 72 million of these producing refunds under the old system. The agency also figures that 88 percent of all taxpayers now getting refunds will still get them.

But this means that 12 percent, or about 8.6 million, will not. In addition, others who now come out even when they file their income tax returns will owe money, while many who already owe on April 15 will owe more.

To avoid the change in withholding, which is automatic, workers must complete a new Form W-4 in which they would claim the same number of allowances as before but would also tell their employers that they want additional money withheld each payday.

People who have taxes withheld at the rate for married people should take out $345 divided by the number of paydays per year. Single employees should use the figure $172, so that if they are paid weekly, the extra amount withheld from each paycheck would be $3.30.

People at higher income levels will not have to make any decision. The government is not reducing the amount of tax withheld for married people starting with incomes of $90,200 and for individuals with incomes starting at $53,200.

The administration contends that in their overall effect the tax changes it is proposing would not increase the federal deficit. The changes would cost the Treasury $5.2 billion in 1992, it says, but receipts would rise $700 million in 1993, $3.1 billion in 1994 and $900 million in each of 1995 and 1996.

But the projection does not take into account the loss to the Treasury of the pool of interest-free money previously available to it from the excessive withholding on taxpayers' paychecks. It is money that the government will have to borrow in the capital markets unless it finds it elsewhere.

Among various "sleeper" proposals in the package are provisions that would force charities to file annual information returns for contributions of over $50. That could cause taxpayers to be more cautious in claiming deductions and might, some analysts said, reduce charitable contributions.

As a whole, the administration said, the provisions are designed to spur the economy in the short run and revitalize it over the long haul. But also among the proposals, analysts noted, were some old favorites of the Bush and Reagan administrations that Congress has long ignored.

For example, lawmakers are not expected to view more favorably this year the renewed call for enterprise zones in economically distressed areas. In this year's version, 50 zones, in which investors or companies would get tax breaks for setting up new businesses or expanding existing ones, would be established over four years.